I am writing to express my strong support for your proposed rule: Implementation of Standards of Professional Conduct for Attorneys. Securities lawyers have too often been abettors of management misconduct both in the recent major frauds that have rightfully shaken investor confidence in the securities markets and the more common smaller violations. Too many of the lawyers who refuse to abet remain silent witnesses to disclosure violations and other misconduct. Professional organizations have not addressed the problem effectively. Therefore, the Commission, with the Congressional backing of section 307 of the Sarbanes-Oxley Act, must act strongly to protect investors.

I applaud the Commission's prompt and strong proposal. It deserves special praise, and gains additional moral authority, because most members of the Commission and its staff will find themselves subject to this rule in future private practice. However, I feel that some minor changes could improve the rule.

Investors versus Shareholders

I am concerned that the proposal does not distinguish clearly between issuers of common stock and issuers of public securities without broad control rights. In the Summary, the purpose of the rule is stated as: "to protect investors." The General Overview states that the rule is intended to discourage "attorney conduct that may...harm shareholders." Throughout the document, the terms "investors" and "shareholders" appear to be used interchangeably and "issuer" is used without specifying whether the issuing entity is publicly owned.

I believe securities lawyers owe three duties:

A general duty to the Commission, and the public at large, to be honest, diligent and competent in professional dealings, regardless of the client.

A more specific duty as securities lawyers to make diligent efforts to ensure that issuer filings are complete and free from material misstatement. This duty is owed to investors in any issuer securities, as well as potential investors, and other interested parties who have cause to rely on the public filings. It applies even if the issuer is not publicly owned.

If the client is a public corporation, a specific and much stronger duty to shareholders to act in their best interests.

The proposed rule appears to treat these duties equally. I think there should be a higher standard of conduct for the more specific duties, and more severe penalties for breaches of duty. For example, a corporation in financial distress might seek to make the legal minimum disclosure of its problems in order to protect its business and access to credit, for the benefit of shareholders. A lawyer who is overaggressive in this effort should be treated more leniently than one who allows an identical lapse for the purpose of allowing insiders to maintain control of a corporation, sell stock at inflated prices or collect bonuses.

In addition to the legal duty, there are important other reasons to offer shareholders stronger protection. Misleading shareholders causes not only direct economic harm, it can be used to attain or retain control of the entity. As residual claimants, any misstatement in any filing affects shareholders, while other parties typically have narrower concerns and means other than public filings to learn about them. Common stock is usually the most volatile security, so misconduct is likely to have the largest economic effect on shareholders. Common stock has the highest proportion of individual investors, who do not have the resources of institutions to protect themselves.

On the other hand, the duty to the Commission should be subordinated to duties to investors. Without an explicit statement of this, human nature might cause Commission staff to concentrate on lapses that make their work more difficult rather than lapses that cost investors money. When making close decisions, a lawyer should think of shareholders first, the investing public in general second and the Commission third.

A useful step in this direction would be to list aggravating factors attorneys should consider in borderline cases such as:

A contest for control of the corporation

Net selling by insiders

Filing violations with direct effects on insider compensation (such as financial statements that determine bonus payouts and filing obligations with respect to insider loans or related entities owned by insiders)

Filing violations that relate to questions shareholders have specifically raised

Dealings among insiders and related entities, including loans to corporate officers and dealings with private companies owned by directors

In my experience, more than one of these factors are always present in cases of serious investor abuse. It would also help to state that the Commission will consider a showing that the lapse was reasonably intended to be in shareholder interest to be a mitigating factor.

Segregation of Enforcement

A related issue is the fear that this rule will discourage attorneys from representing shareholder interests aggressively. I ask that the Commission consider segregating enforcement of this rule from general enforcement and approving attorney investigations at a high level. This should reassure attorneys that the rule will not be used to punish vigorous defenses or gain revenge for Commission defeats in enforcement actions. Also, it should be made clear that attorney sanctions will never be on the table during settlement talks with an issuer, as that would result in a strong conflict of interest for the issuer's attorney.

Reply to Comments of Edward Fleischman

Deferring for a moment the six specific complaints in this comment, the letter makes mangles historical sources in an impassioned plea against any interference with immunity for attorneys. Mr. Fleishman attempts to link his case to deep American values with:

Adapting somewhat from Federalist Paper No. 78: In a monarchy the Bar along with the Judiciary is an excellent barrier to the despotism of the prince; in a republic the two are a no less excellent barrier to the encroachments and oppressions of legislative and administrative agencies of government-no matter how well-intentioned.

Alexander Hamilton actually wrote:

The standard of good behavior for the continuance in office of the judicial magistracy, is certainly one of the most valuable of the modern improvements in the practice of government. In a monarchy it is an excellent barrier to the despotism of the prince; in a republic it is a no less excellent barrier to the encroachments and oppressions of the representative body. And it is the best expedient which can be devised in any government, to secure a steady, upright, and impartial administration of the laws. (emphasis mine)

Hamilton argued that professional standards for the judiciary, not the judiciary itself, is the barrier to despotism. His is an eloquent plea for the proposed rule rather than an argument against it.

Mr. Fleischman further claims a:

Bill-of-Rights-enshrined value of a Bar independent of government agencies, motivated by standards of professional ethics, and unburdened by concern over self-protection when engaged in the vindication of clients' rights.

Lawyers are mentioned only in the sixth amendment, and only for criminal prosecutions. As one of ten rights of criminal defendants, "In all criminal prosecutions, the accused shall enjoy the right...to have the Assistance of Counsel for his defense." Even if there were a secret Lawyers' Amendment that stipulated Mr. Fleischman's "value" as constitutional rights, the proposed rule would be consistent with it. It defines a standard of professional ethics, and strips lawyers of protection only when they work against client (shareholder) rights. The Commission is not a government agency and, in any event, Mr. Fleischman cannot mean that lawyers, by virtue of their bar membership, should be free of any possibility of any sanction by any government entity.

Next Mr. Fleischman urges the Commission to "Think John Adams and his defense of the redcoats after the Boston Massacre." Again, this reverses the lesson of history. Adams was defending government soldiers, if anyone had to fear government retaliation it was prosecutor Robert Paine. In any event, Adams took his fee from defendant Thomas Preston. Had Adams learned of misconduct by an agent of Preston relating to the case, I have no doubt he would have felt obligated to inform Preston. That is all this rule requires of modern securities lawyers. Finally, it is unwise to cite the signer of the Alien Act as a defender of the right to counsel or the signer of the Sedition Act in support of the right to act contrary to government wishes.

Taking up the six specific complaints, the first, fourth and fifth are challenges to the scope of the rule and the Commission's authority. I urge the Commission to retain the breadth of the rule. Managers can choose which lawyer to use, so any narrowing or loopholes would make the rule ineffective. For example, if non-US lawyers were exempted, foreign law firms would quickly become the choice for bad faith filings.

I am not qualified to speak to the Commission's and Congress' legal authority in this matter, but I think the Commission has strong moral authority. In my view, the Commission is acting not only under power delegated by Congress, but as a representative of investors. I have no doubt that the overwhelming majority of investors would vote in favor of this rule for an individual company, if it were submitted as a shareholder proposal. As a client instruction, even Mr. Fleischman cannot object to it. Therefore, it is only defects in the corporate governance process that prevent this rule from being in force already.

I agree with Mr. Fleischman's second and third complaints. I think they can be addressed by segregating enforcement as suggested above.

The sixth objection attacks the "noisy withdrawal" provision. I agree with the Commission that the rule would be incomplete without it. The Commission should be alerted if a securities lawyer believes an issuer is engaged in, or plans to engage in, material violations likely to cause significant harm to investors. The lawyer need not specify the violations or evidence, merely that withdrawal is for professional considerations. In serious cases of misconduct top management and directors are often involved or neutralized, confidential internal reporting may not be effective however high up the ladder it goes.

I further agree with the Commission that noisy withdrawals will be rare. The main effect, in my opinion, will be to force board members to take up the ladder reporting seriously. Failure to take appropriate action, in the opinion of the complaining attorney, will invite Commission scrutiny. That will cause board members to consider the matter very carefully, and only persist in the conduct at issue if they are sure it is defensible. Many issuers will establish qualified legal compliance committees to avoid this requirement, which will have the same effect of making it more likely that attorney reports of misconduct will be considered seriously.